Since the onset of the COVID-19 crisis, with digital health treatments becoming indispensable, the medical services industry has witnessed a significant demand for telemedicine-driven online medical services and AI-based technology services. Companies in the remote healthcare sector have seen their stocks rally amid economic volatility. EquityHealth HQY AMN health services AMN and ModivCare MODV are some of these stocks. During the pandemic, observing the growing demand for remote treatment options, many healthcare companies that were not technology-based have traditionally transformed into technology-based companies to survive in the market.
Meanwhile, the resurgence of COVID-19 cases has dealt a heavy blow to manual labor and healthcare infrastructure as patients again postpone non-essential procedures and hospital stays. At the same time, although the severity of the pandemic has diminished considerably, hospital staff shortages are being reported across the country, disrupting health services. Additionally, COVID-19 has wreaked havoc on the National Health Expenditure (NHE) front, causing massive turmoil in terms of health spending, utilization, and employment trends.
Description of the industry
The Zacks medical services industry includes third-party service providers and caregivers appointed by major healthcare companies for economies of scale. The industry includes pharmacy benefit managers, contract research organizations, wireless MedTech companies, third-party testing laboratories, surgical facility providers, and healthcare workforce solution providers, among others. Over the years, this industry has strategically shifted from volume-based care to value-based care. This change in care methods requires state-of-the-art equipment, thus increasing the need to call on specialized external service providers. With the growing importance of effective healthcare management, the medical services industry has become an integral part of the modern healthcare system.
4 trends shaping the future of the medical services industry
Staff shortages related to COVID: Although in recent months the severity of the COVID-19 pandemic has decreased significantly in the United States, the emergence of new variants, as well as a new category of epidemic such as human monkeypox, has forced frontline workers like doctors and medical staff leaving the field. According to a July 2022 report by US News, approximately 1.5 million healthcare jobs in non-COVID sectors were lost in the first two months of COVID-19. Although the situation later stabilized, the healthcare employment scenario never returned to pre-pandemic levels. There are fewer healthcare workers in the field who are exposed to a much wider set of patients, increasing levels of workforce burnout. According to the report, the American Hospital Association has called this hospital labor shortage a “national emergency,” predicting that the overall shortage of nurses will reach 1.1 million by the end of 2022.
Disruption in health spending: According to a Health Affairs report, the CMS annual update of the National Health Expenditure Accounts (NHEA), published in December 2021, clearly showed that the NHE increased by 4.6% in 2019, showing a relatively stable trend of annual growth since 2016. However, this consistency was disrupted by COVID-19 starting in March 2020, leading to massive short-term healthcare spending and employment disruptions.
Digital revolution amid the pandemic: With an increase in the adoption of digital platforms in the medical device space, remote monitoring, robotic surgeries, big data analysis, 3D printing and electronic health records are gaining prominence in the States -United. A 2020 report on the digital health market suggests that this market, valued at $106 billion in 2019, will see a CAGR of 28.5% through 2026. Other reports suggest that companies that have adopted technologies artificial intelligence have experienced a 50% reduction in treatment costs and experienced more than a 50% improvement in patient outcomes. Amid the pandemic, this healthcare line is becoming a major choice for contactless healthcare services.
Nursing market boom: With the growing awareness of the benefits of providing specialist medical care, the need for healthcare personnel/staffing service providers has increased dramatically. For example, the demand for nurses has increased in several ways, driven by the rising incidence of chronic disorders in the United States and is expected to be high in the days ahead. According to a report published by Data Bridge Market Research, the US nursing market size is expected to grow at a CAGR of 5.1% during the period 2020-2027.
Zacks’ industry rankings point to boring prospects
The Zacks Medical Services industry is part of the larger Zacks Medical sector. It carries a Zacks industry ranking of #151, which places it in the bottom 40% of over 250 Zacks industries.
The group’s Zacks Industry Rank, which is essentially the average Zacks Rank of all member stocks, indicates a lackluster near-term outlook. Our research shows that the top 50% of industries ranked by Zacks outperform the bottom 50% by a factor of more than 2 to 1.
We’ll highlight a few stocks that have the potential to outperform the market based on strong earnings prospects. But it’s worth taking a look at industry shareholder returns and current valuation first.
The industry underperforms the sector and the S&P 500
The medical services industry has underperformed its own sector as well as the S&P 500 over the past year. Shares in this industry collectively lost 32.6% during the said period, compared to the 8.9% drop in the S&P 500 composite. The medical sector fell 21.6% during the same period.
Year-over-year price performance
Current industry assessment
Based on the 12-month price-to-earnings (P/E) ratio, which is commonly used to value medical stocks, the industry is currently trading at 16.17X versus the S&P 500’s 17.70X and 21. 30X of the sector.
Over the past five years, the industry has traded as low as 22.14X, as low as 11.79X and at the median of 14.56X, as seen in the charts below.
Year-over-year price/earnings forecast (F12M)
Year-over-year price/earnings forecast (F12M)
3 stocks to buy now
Below are three stocks in the medical services sector that have seen positive earnings estimate revisions and currently have a Zacks ranking of #1 (strong buy) or #2 (buy).
AMN health services: AMN Healthcare recruits and places nurses, physicians and other healthcare professionals on assignment or on permanent assignment in acute care facilities, physician groups and other healthcare facilities. According to AMN Healthcare, increased healthcare utilization and a tight labor market have led to record demand in several areas of the company’s business. This, in turn, bodes well for AMN Healthcare’s collaborations and innovations, which aim to provide better access to patient care, thereby building trust.
AMN Healthcare’s historical long-term earnings growth rate is set at 28.8%. This Zacks No. 1-ranked company has posted a surprise profit of 15.7%, on average, over the past four quarters.
Pricing and Consensus: AMN
ModivCare: ModivCare is a technology-enabled healthcare services company, providing a suite of integrated supportive care solutions for public and private payers and patients. ModivCare provides non-emergency medical transportation services for Medicaid or Medicare-eligible members whose mobility or limited financial resources impede their ability to access needed health care and social services.
ModivCare’s historical long-term earnings growth rate is pegged at 34.6%. Zacks consensus estimate for ModivCare revenue in 2022 indicates a 19.5% year-over-year increase. The stock carries a No. 1 Zacks rank.
Pricing and Consensus: MODV
EquityHealth: HealthEquity’s business is currently benefiting from strong contributions from the solid growth of its flagship HSA health savings account. In addition to the HSA, the company offers health reimbursement terms to regional employers. Strong sales of new HSAs in the reported quarter are encouraging.
The redemptions of HealthEquity’s Further and HealthSavings HSA portfolios (which closed November 1, 2021 and March 2, 2022, respectively) are causing optimism.
HealthEquity’s expected long-term earnings growth rate is set at 24.3%. This Zacks No. 2 ranked company is expected to generate 10.2% revenue growth in 2022.
Pricing and Consensus: HQY
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